The economic outlook is shifting – should your plans change too?

With the government flipping from tax raising to tax cutting and the Bank of England set to begin a period of monetary loosening, does the shifting outlook warrant tweaks to your financial plan?

There are few periods in British history where people’s pockets have been squeezed as much as they have in recent years. From rising taxes to skyrocketing energy bills, continuous interest rate hikes to rapid inflation, it has been all too easy to feel that we’ve been hit from all angles financially for an extended period. But, finally, it appears there is light at the end of the tunnel.

The government is in the midst of a tax cutting campaign which will put more money into people’s pockets, wages are rising faster than prices and the Bank of England is expected to soon begin cutting interest rates following a sharp fall in inflation. The more optimistic tone from the government, which is publicly stating that the economy is “turning a corner”, appears to be filtering through to consumer confidence, which recently reached its highest level in two years.

Following a difficult few years financially for many people, there are signs of a more positive outlook emerging. But does the shifting outlook mean your financial plan needs to change too?

Reverting to type?

The answer will largely depend on whether your financial plan changed at all during the cost of living crisis. A robust plan is carefully crafted for the long term to withstand inevitable peaks and troughs along the way, so generally the most successful principle is to stick with the plan. The extreme impacts of the past couple of years, however, meant that wasn’t possible for everyone.

James Davison - Independent Financial Adviser, Ascot Lloyd

“In terms of my own clients adjusting their financial plans, it was quite limited but certainly there were some,” says James Davison, Independent Financial Adviser, Ascot Lloyd. “People should absolutely have a long-term plan that is resilient, but it can't always be resilient in every situation and the past couple of years have been quite an extreme situation. There has not just been a cost of living squeeze but many also saw their portfolios materially down – a double whammy.

“Our job through that was to have discussions with clients about not panicking and making sure their risk profile is appropriate for their capacity for risk and capacity for loss. Naturally some were slightly surprised and not very impressed by the direction of their lower risk portfolios for a period of time. It was painful for them, and some did have to draw on their pensions to deal with the cost of living, or as was more common they just stopped making the savings they used to.

“As we've returned to some sort of normality it reinforces the message that it's time in the market that's important and we're now revisiting their financial plans to either return back to their previous plan as quickly as possible or perhaps devise a slightly new plan to take account of the changes that had to be made. We are always revisiting things to see if anything's changed as time moves on, reassessing the current level of pensions and what is a sustainable level to be drawing, is that sufficient to cover their needs and might they need more or less in the future?”

Resurgence of annuities

One substantial change that has occurred to the financial planning landscape over the past couple of years is the resurgence of annuities. An annuity, which pays a guaranteed fixed income for life in return for a lump sum of your savings, was traditionally a very popular form of retirement income. Its popularity crashed, however, when interest rates plummeted following the global financial crisis and when the government introduced new pension freedoms in April 2015.

Fourteen consecutive interest rate rises since December 2021 coupled with general market volatility has seen people snapping up annuities, renowned for the security they offer, in far greater numbers. Last year, annuity sales increased by a massive 46% to £5.2 billion, according to the Association for British Insurers (ABI), and the number of annuity contracts sold increased by 34% year on year to 72,200, which was the largest number recorded by the ABI since 2016.

“Annuities are definitely back on people's radars,” says Davison. “It's very much a viable option again whereas it almost wasn't before due to the low rates on offer. I have done some annuities for the first time in years for clients who are benefiting from the materially higher rates. One was a full annuitisation for quite a large pot and one was a partial annuitisation to give them a base income. The latter was a client who likes the idea of drawdown and the inflation protection by keeping a drawdown pot invested, but he also likes the security and certainty of a level annuity.

“I think we’ll see a bit more of that for clients who want certainty and where the numbers are attractive, however I don't see a big swing back to lots of annuities happening. Obviously, inflation is now coming under control and it's looking quite positive, but if it remains higher for longer than expected then you might feel the pain later down the line if inflation is eating away at your annuity level. Annuity products can be pegged to inflation but due to the much lower rates on offer it’s not been an attractive option in almost every discussion I've ever had with clients.”

Time in the market

While tweaks to your financial plan might be somewhat warranted during periods of significant change, adjusting your investment strategy should generally be avoided. A robust, long-term investment strategy should be well diversified and designed to withstand the ups and downs that all markets experience. While the dips can induce anxiety, data consistently shows the value of remaining invested. Looking at 20 years of the S&P 500 up to 2009, J.P. Morgan Asset Management found if you missed the ten best days in the market your return was cut in half.

Building a considered portfolio with a healthy balance of assets, including stocks, bonds and cash, will give an investor a better chance of withstanding any shocks that occur in the market. Meanwhile, one thing investors should feel confident about is interest rates, while expected to fall this year, are unlikely to return to the rock bottom levels seen after the global financial crisis.

Chris Smith - Head of Avellemy Private Wealth“We're into a different interest rates regime now and so investors shouldn't expect the returns they've seen for the last 10 to 15 years from markets,” says Chris​​​​ Smith, Head of Avellemy Private Wealth. “Even if we are out of recession already, we're in a period where the economy is going to stagnate at more or less 0% for a while and the general feeling of recession will probably persist for another six months or so as interest rate cuts take a while to filter through.

“The UK is unloved as a market – it needs investment from abroad and some kind of catalyst for growth whether that’s from fiscal or monetary policy or elsewhere. The US I do still think is overvalued and underestimating the risk of recession, but Japan is one place where we do see longer term growth. The big thing this year is political, with elections for half the world's population. With so many uncertainties, it reinforces the importance of diversification. At no point in time should you ever have all your eggs in one basket. Always spread your exposure.”

Speak to your adviser who will be able to help you plan for a successful financial future, or alternatively, request a call back.